3-3: Government and Free Enterprise

Providing Public Goods How do we decide which sector of the economy should produce a good or service? ▫ Free enterprise will produce a good if all benefits go to the buyers and sellers

Market Failure Definition: Occurs when people who are not part of a marketplace interaction benefit from it or pay part of its costs

What are public goods? Goods and services that are provided by the public as a group

Characteristics of Public Goods People cannot be excluded from the benefits of the product even if they don’t pay for it One person’s use of the product does not take away from its usefulness to others

Examples of Public Goods City street lighting National defense

Free Rider Definition: person who avoids paying for a good or service but is able to benefit from that good/service Free rider is an example of market failure

Example of a Free Rider Example: fireworks display

Public and Private Sector— Shared Responsibilities One shared responsibility: infrastructure—all goods and services necessary for society to function Examples: highways, bridges, airports

Externalities Another type of market failure Definition: side effect of a product that affects someone other than the producer/buyer

Negative Externality Definition: externality that has a negative effect, or cost, on people who were not involved in the original economic activity Example: pollution

Limiting Negative Externalities Can be eliminated by the government through taxes and fines

Positive Externality Definition: externality that creates benefits for people who were not involved in the original economic activity Example: a park, rose garden, etc

Spreading Positive Externalities A subsidy is one way to increase a positive externality ▫ Definition: a government payment that helps cover the cost of an economic activity that has the potential to benefit the public as a whole

Public Transfer Payments A government program designed to protect people from economic hardship is known as a safety net

Redistributing Income One way to redistribute income is through transfer payments— transfer of income from one person to another even though the person receiving the payment does not give something in return Example: money received as a gift

Public Transfer Payment Definition: a transfer payment in which the government transfers income from taxpayers to recipients (who do not provide anything in return)

Social Security An example of a transfer payment Taxes are taken out of our paychecks and used to fund the retirement of those eligible for Social Security benefits